Current Moves in Forex Market

Friday, December 5, 2008

US-China talks yield little.

The US-China economic dialog talks seemed to have mostly centered on shoring up the stability of the financial system, an understandable worry on China's part after all of this turmoil, considering its enormous holdings of US debt. The talks ended with no substantive announcement on Chinese currency. Instead, measures were announced to allow freer access by Chinese banks in the US market and various other "agreements" were likely on electricity generation, environmental issues, etc.. The talks were unlikely to lead to much substantive with Paulson as the lame duck US treasury secretary. We will have to wait for Obama and Geithner and company to see whether the Strategic Dialog framework continues and how combative the president-elect remains on the Chinese currency, after using it as a populist issue in the campaign. Will the Chinese continue to keep the Yuan in this range just below 7.00, or will they allow some weakening of the Yuan to test the Obama team's resolve ahead of inauguration? This is a huge issue.

US employment report

Another fearsome US employment report is on tap for today, as the US economy may have lost more jobs in one month than at any time since the early 1980's. Expectations for the Change in non-farm payrolls are running for a drop of well over 300k. The unemployment rate is expected to jump again, this time to 6.8%. There is nothing to suggest any chance of upside surprise on this data. The question is how dependent the USD is on economic data after yesterday's attempt at a reversal.

CAD under pressure

CAD fell sharply across the board yesterday on another wave of capitulation in crude oil prices and on developments in Canadian politics: as PM Harper convinced the Governor General to suspend parliament until late January in a bid to save his government from a confidence vote and attempt to refocus the legislature on the budget. This was an unprecedented move. Also, the bottom fell out of the Canadian Ivey PMI yesterday, which registered its lowest level in the near 10-year history of the survey. It would appear that a test of the 1.3000 level in USDCAD may be in the works soon.

Market action

Equities sold off sharply later in the US session, and this took the JPY stronger again after the short squeeze earlier in the day had driven the JPY sharply weaker. These markets are indeed treacherous as directional signals last mere minutes before reversing course. CHF also woke up and got back on its old safe haven horse briefly, and EURCHF dipped to test its 21-day moving average again before easing back higher overnight as the equity sell-off failed to turn into a rout. We really need a breakout of some kind that holds to get a better directional indicator.

The parabolic drop in US yields at the long end is due to the clear intention by the Fed and Treasury to try to control the long end of the government yield curve, in an effort to shore up the housing market. The dramatic fall in mortgage rates (due to outright purchase of GSE mortgage debt announced previously and the indication that the Fed will likely monetize debt down the road) has seen a boom in refinancings. US yields are plummeting relative even to European yields all along the curve, and thus not really providing any support for the USD in terms of interest rate differentials. This action looks downright panicky and unsustainable.


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